Tuesday, April 8, 2014

Technical Analysis: Flag and pennant on cable | A textbook trade on the Yen

Cable, so called in the Forex
community because GBPUSD was the first instrument to be the subject of
electronic exchange, which was carried out via an undersea cable across the Atlantic, has recently formed two classic Technical
Analysis patterns. One of them has already fulfilled the prediction that is
inherent in it, while it remains to be seen if the other will do so.

They are a flag and a
pennant, and they are illustrated on the weekly chart above. In the case of the
flag, the price movement from A to B is considered to be the “flagpole”, and
the expectation in the classic case is that price should continue to move in
this direction. As can be seen, it proceeded to do so.

The pennant has the same
expectation. If this Technical Analysis theory has validity, the exchange rate
of the GBPUSD pair should proceed in the upper direction when the tip of the
pennant is reached. Identifying the tip is not, of course, a perfect science.

Two things need to be pointed
out here: One, Technical Analysis pattern expectations are not always observed
in practice and two, this particular pair has been at a significant resistance
level, which it has yet to break out of in a compelling manner, for some time. You
can see our analysis of it here.

A textbook trade on the Yen

We have been working with the
Dollar Yen pair (USDJPY) for some time, in the expectation of a rise in this
unit. To that end our Mandelbrot algorithmic routine took a position in the
middle of March.

We would have liked this pair
to trend and we can only envision this happening, in the case of USDJPY, right
now, in the upward direction. When that fails to come about, for one reason or
another, Mandelbrot is programmed to make the best of the situation.

The story told by the chart
above is a textbook example of a Mandelbrot outcome where such a trend failed
to build. Half the position was taken off, as a matter of principle, when
profit reached 2% of equity and the remainder was left in place to catch the
trend, should it develop. When it failed to do so, Mandelbrot closed out the
entire at the second level shown. In this way we wind up with a decent profit
on the trade and, which is of crucial importance, we also preserve our equity, allowing Mandelbrot
the luxury of continuing to monitor the situation and to eventually take full
advantage, whenever this pair does decide to take off.